Dollar Rises as Treasury Yields Hit 2-Year High; BoJ Disappoints Hawks

© Reuters.

By Geoffrey Smith 

Investing.com -- The dollar rose in early dealings in Europe on Tuesday, pulled higher as concerns over inflation pushed 10-year U.S. government bond yields to their highest in over two years. 

The yield on the 10-year U.S. benchmark rose as high as 1.86% in the overnight session, a level it last saw when practically no-one outside China had heard of Covid-19.  The two-year benchmark yield, which is more sensitive to expectations for short-term interest rates, also broke above 1% for the first time in two years.

By 3 AM ET (0800 GMT), the dollar index, which tracks the greenback against a basket of advanced economy currencies, was up 0.1% at 95.287. 

The dollar returned briefly above the 115 yen level after Bank of Japan Governor Haruhiko Kuroda said the bank hadn't discussed the possibility of raising interest rates, as had been reported by newswires last week. That was despite the fact that the bank raised its outlook for inflation slightly to 1.1% for the next two years. That is still well below the bank's 2% target.

"For the foreseeable future, we see little chance of the BoJ adjusting policy rates," said Oxford Economics analyst Shreena Patel. "We believe the yen will remain weak this year but that room for further depreciation is limited."

USD/JPY traded at 114.79, up 0.2% on the day. 

The dollar had hit a five-year high against the yen earlier this month, amid expectations that the Federal Reserve will tighten monetary policy much more this year than the BoJ. The Fed's first policy meeting of the year takes place next week, and policymakers have now entered their usual blackout period ahead of it. 

In Europe, the pound was flat against the dollar at $1.3639 but edged up against the euro despite numbers showing that unemployment fell by less than expected in the three months through November. Analysts zeroed in on a sharp downward revision to the claimant count in November and to a bigger-than-expected drop again in December, suggesting that the U.K. economy rode out the first part of the winter wave of Covid-19 comfortably enough.

The euro was also little changed against the dollar at $1.1402, ahead of the release of the German ZEW economic sentiment index for January.

In emerging markets, the ruble weakened again amid growing fears that President Vladimir Putin will send his tanks across the Ukrainian border again. USD/RUB rose 0.4% to 76.40, although the movement was largely in line with other emerging market currencies as the dollar strengthened again. 

The ruble typically reacts badly to geopolitical shocks emanating from Russia, but the country's foreign exchange reserves stand at a record high, while its public debt is low and foreign currency borrowing by its corporates has fallen by nearly half since the last time it invaded Ukraine in 2014. With prices for oil and other commodity prices still high, the ruble has various pillars supporting it.